True friends of labor

Money | Every state celebrates Labor Day, but some states are better than others at actually promoting labor

New York City reportedly hosted the first Labor Day parade on Sept. 5, 1882. Eleven years later, Labor Day had spread to more than half the states, and in 1894 Congress voted to make it a federal holiday.

Today, every state celebrates Labor Day-this year also on Sept. 5-but some states are better than others at actually promoting labor, and the differences can be stark.

Take Nevada, for example. Jobs in the Silver State grew like weeds last year, with the Bureau of Labor Statistics reporting 6.7 percent employment growth for the state. That was the best in the nation in 2004, and more than 50 percent ahead of the next fastest job-producing state (Arizona at 4.4 percent). Employment in Rhode Island, however, barely grew at all, registering an anemic 0.4 percent, and Michigan actually saw a decline of 0.3 percent.

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What accounts for the disparity? A number of factors can play a role in job creation, but one that immediately stands out is taxes: Nevada does not have an individual income tax or a corporate tax, while Rhode Island and Michigan are both high-tax states.

The correlation between low taxes and jobs holds for most other states as well. For the past two years, the Tax Foundation, a free-market think tank, has ranked the states according to how their tax systems treat businesses. The "State Business Tax Climate Index" measures corporate income, individual income, and sales taxes, among other factors. Where a state ranks on the index is often a rough predictor of its employment growth.

Of the 10 states that the index rated as friendliest to business in 2004, only two (New Hampshire and South Dakota) had employment growth lower than the national average of 1.7 percent (see table). Meanwhile, of the 10 states rated least friendly to business, only one (Hawaii) had employment growth higher than the national average. Most of the business-friendly states grew significantly faster than the national average, and most of the business-hostile states lagged significantly behind.

Another trend is hard not to notice: Most of the employment growth in the United States is happening in "red states," while "blue states" tend to produce very few new jobs. President Bush carried eight of the 10 states with the fastest employment growth (Nevada, Arizona, Florida, Idaho, Utah, Montana, North Dakota, and Virginia). Democratic nominee John Kerry won six of the 10 states with the slowest employment growth (Michigan, Massachusetts, Rhode Island, Illinois, Maine, and Pennsylvania).

Most people consider the high-tax northeastern states to be pro-labor and the low-tax western states to be anti-labor. But the numbers from the Tax Foundation and the Bureau of Labor Statistics turn such assumptions on their head.

The Labor Day lesson for state governments: They don't do workers any favors when they overtax companies. Most states that are pro-labor were first pro-business.